From the Virginia Society of Certified
Public Accountants - Presented by Dean Knepper, CPA, CFP®

TAX BREAKS AVAILABLE FOR MILITARY FAMILIES

(October 25, 2004) — With Veterans Day approaching, now is an appropriate
time to review the tax benefits available to members of the Armed Forces who
serve our country. President Bush signed into law the Military Family Tax Relief
Act of 2003 in November of last year. The benefits of the Act range from helping
military personnel manage the costs of homeownership and dependent care to
education costs and travel expenses. Highlights of the Act follow, provided
by the Virginia Society of CPAs.

Death Benefits Increased

The 2003 Military Family Tax Relief Act increases the amount paid to survivors
of deceased members of the Armed Forces from $6,000 to $12,000. This change
applies to deaths after Sept. 10, 2001. In addition, the entire $12,000
benefit is excludable from income. Previously, only $3,000 was excludable.

Tax Return Filing Date Is Extended

Military personnel stationed in combat zones receive additional time to file
and pay federal income taxes — up to 180 days after the last day you
are in a combat zone, the last day you have qualifying service outside of
a combat zone or the last day of any continuous qualified hospitalization
for injury from such service. In addition, any days that are left on the
normal 3 1/2 month period to file your return when you entered the combat
zone are added to the 180-day period. You may be able to file a refund claim
if tax was paid on a death gratuity received as a result of a death that
occurred after Sept. 10, 2001. The 2003 Act extends this benefit to military
personnel involved in contingency operations.

Special Tax Treatment Available for Military Homeowners

The 2003 Act eased the tax rules on a sale of a personal residence for soldiers
called to qualified extended duty at least 50 miles from home. Under current
tax rules, taxpayers can exclude up to $250,000 ($500,000 for joint filers)
in gain from the sale of a principal residence. To qualify, the homeowners
must own and live in the house for at least two of the five years ending
on the date of sale. Many military men and women find it difficult to meet
this residency requirement. To address this issue, Congress revised the rules.
As a member of the military you still must have lived in your home for at
least two years, but you can suspend the five-year period for up to 10 years.
That means military personnel who have lived in their homes for two out of
up to 15 years may qualify for the capital gains exclusion. This special
election is effective for sales made after May 6, 1997, so qualifying taxpayers
who paid tax on a gain from a sale after that date may be able to claim a
refund. But hurry — Nov.
10, 2004 is the deadline for amending tax returns for years 1997 through 2000
for this purpose.

Reservists Can Deduct Travel Expenses

Membership in the National Guard and Reserve often requires travel, and
not all of those expenses are reimbursed by the military. Under a special provision
in the Act, reservists who must travel more than 100 miles from home and
stay overnight may deduct unreimbursed travel expenses, including meals,
lodging and transportation, up to the per-diem allowances. Previously,
such expenses were deductible only as an itemized deduction, subject
to the 2 percent of adjusted gross income limitation. Effective Jan. 1, 2003,
reservists can take the deduction regardless of whether they itemize.

When Home Prices Decline

The Department of Defense Homeowner’s Assistance Program is a special
program that makes housing assistance payments to compensate military service
members when home values decline as a result of the partial or complete closing
of a military base. Under the 2003 Act, such payments made after Nov. 11, 2003
are excluded from income. However, the exclusion amount cannot be more than
95 percent of the fair market value of the property before public announcement
of the intent to close all or part of the military base or installation, minus
the fair market value of the property at the time of sale.

Dependent Care Expenses Are Tax Free

The Military Family Tax Relief Act also clarifies that the dependent care
assistance provided to members of the Armed Forces is not included in their
income.

Military Academy Enrollees Eligible for Waiver of Penalty

There is a 10 percent tax on payments received from a Section 529 Plan or
a Coverdell Education Savings Account when the proceeds are not used for
qualified
educational expenses. A provision in the 2003 Military Family Tax Relief
Act waives the penalty for individuals who are appointed to the U.S. Military,
Naval, Air Force, Coast Guard or Merchant Marine academies.

Additional Information Available

If you or someone you know has questions concerning benefits for military
personnel, visit www.irs.gov or contact
a CPA.

The Virginia Society of CPAs is the leading professional association
dedicated to enhancing the success of all CPAs and their profession by communicating
information and vision, promoting professionalism, and advocating members’
interests. Founded in 1909, the Society has nearly 8,000 members who work
in public accounting, industry, government and education. This Money Management
column and other financial news articles can be found in the Press Room on
the VSCPA Web site at www.vscpa.com.